The Fed is ‘in a box’ when it comes to inflation: Interactive Brokers Group founder

Interactive Brokers Group Founder and Chairman Thomas Peterffy joins Yahoo Finance Live to discuss the company's fourth quarter earnings, the Fed raising interest rates, inflation, meme stocks, and retail trading.

Video Transcript

BRIAN SOZZI: Interactive Brokers saw a 56% increase in customer accounts in the fourth quarter as the rise in markets lured in investors. Investors are liking the numbers with shares up about 2% in the pre-market here. Joining us now is Interactive Brokers founder and chairman Thomas Peterffy.

Thomas, always nice to see you. So big quarter of growth in customer accounts like I just mentioned, but on the call last night, you guys did warn that that is likely to slow this year to about 30% to 40%. Why would that be the case?

THOMAS PETERFFY: Well, first of all, it's 56% for the year, right? So the 56% is an annualized rate, so in 2021, we added over 600,000 customers. But what's more important is that we have done over two and a half million trades on the average day.

It is difficult to keep the high-growth rate on new customers as the number of old customers grow, right? I mean, when you have a million customers, it's easy to do 56%. That's 560,000 customers. But when you have two million customers, you would have to do a million plus in order to remain at 56%, so that's-- as you grow, it's very difficult to keep a high-growth rate.

BRIAN SOZZI: And, Thomas, certainly, want to dig more into the quarter. But I was on the call yesterday, and your comments on the Federal Reserve really caught my attention. You noted that you are extremely worried about higher interest rates this year. What is driving that worry, and what are higher interest rates likely to mean for the average investor?

THOMAS PETERFFY: Well, the reason I'm worried about high interest rates is that the Fed is talking about raising rates to 1% or maybe even 2%. When inflation is 7%, 1% or 2% doesn't mean anything. So if they really wanted to stop inflation, they would have to raise rates to 4%, 5%, 6%, right? But at that rate, the debt service on the 29.3 trillion of debt would become so incredibly expensive that they-- a three and a quarter, for example, it would be a trillion dollars, that would just add new deficit spending.

And new deficit spending, all that does, it raises the rate of inflation because it puts more money into circulation. So I think they are in a box. They can't raise rates much above 1% or 2%, and inflation can stay up there for a long time. And people will get used to that, and it will become endemic. So I-- that's the reason for my fears.

Now what that means for customers is that customers will probably be best off taking on leveraged positions and maybe come to us because at the Interactive Brokers, our margin rates are only about 1% over Fed funds rates, so that is the reason why our margin interest-- I mean, the amount of margin we have outstanding has grown to $54 billion in 2021, and that's a 40% growth relative to the preceding year.

JULIE HYMAN: Hey, Thomas. It's Julie. I wanted to get you to expand on that margin loan growth that you saw that you just alluded to, to almost $55 billion. So as rates go up, do you not see a decline in demand for margin loans because it's going to get more expensive for customers to do so? Does that also take some liquidity out of the market?

THOMAS PETERFFY: I do not expect that to happen as long as inflation also goes up, right? So as long as real interest rates are negative as they are today-- they are negative 6% or negative 7%-- I don't see-- that's what matters. Absolute rates don't matter.

JULIE HYMAN: And also it makes me think about the fact that, as I mentioned a few minutes ago, that we're about a year out from the sort of meme stock surge, right, and retail investors really getting more involved in the market. As we see rates start to go up this year, how do you think that whole trend is going to evolve?

THOMAS PETERFFY: Well, I do hope that investors refocus on fundamental values because this meme stock idea-- I mean, it's fun, but it is not sustainable. So I think a lot of people will lose a lot of money on these meme stocks, and that's-- I mean, it's not good for-- it's not good for the market, and it's not good for the people. So I welcome the idea of meme stocks coming down in value.

BRIAN SOZZI: Thomas, are you still bullish on the outlook for the options market this year?

THOMAS PETERFFY: Definitely. So options markets are increasing. The trading volume is increasing tremendously. In the last few months, the markets have been handling 40 million contracts a day. Interactive Brokers customers represent 10% of that, namely four million contracts a day, and this is an unheard of daily volume.

And it's just absolutely amazing, so most people are beginning to focus now on option combinations, like you buy a certain strike, you sell a strike higher on calls if you're bullish, or do the reverse if you're bearish on puts. And so you take a $50 stock. If you want to buy it on margin and margin is 50%, say, you still have to put up $25,000. If you want to buy a call option on a $50 stock, you can do that for $200, or $300, or $400, so it's a very big difference.

And if you are using combinations, such as a bull spread where you buy a lower strike and sell at higher price, a higher strike call, then you have to put up a small fraction of that. And so that gives you a tremendous ability to build specific risk profile positions, and it's a lot of fun I always thought. That's why I spend most of my life trying to computerize the options markets, and now that we are there, I think it's tremendous.

JULIE HYMAN: Yeah, that worked out well in the end. And, Thomas, finally, I want to ask you about crypto too because it seems like you've sort of had a come-to-Jesus moment when it comes to crypto or at least not as antagonistic as you once were. It seems like you're willing to sort of throw a little bit of money, personal money, at this and also, of course, allow crypto trading on the platform. What changed your mind? What was sort of the critical mass or the turning point for that?

THOMAS PETERFFY: Yeah, so this issue is being misunderstood. I was never opposed to crypto. I was opposed to the Chicago Mercantile Exchange listing futures on cryptos, but I wasn't even opposed to that. I was opposed to the margin that they wanted to impose on crypto futures positions because now we have a little bit more history, but it's still an extremely volatile product, right?

So Bitcoin right now, you say $42,000, but there is nothing really to prevent that $42,000 price to go to, say-- to double overnight, right? So that means that unless they impose a 100% margin, which they do not-- I don't exactly know what the margin is, but I expect it would be about something like 30% or 40% of the volume. The problem is that it is the broker that holds the bag when customers take on positions where the product goes against them and the customer cannot pay the losses.

Now the issue is that there are smaller brokers in this game who have very little capital, and they are quite prepared to-- they take the earnings out every month or every quarter out of the company, and they are quite prepared to go bankrupt if some crazy things like that happens. But larger brokers, like ourselves, are in a more difficult situation because we have a lot of capital in the business and we cannot afford to have a lot of customers default on us.

BRIAN SOZZI: All right, we'll leave it there. Always great to spend some time with you. Interactive Brokers founder and chairman Thomas Petterfy, good to see you. We'll talk to you soon.